Investing in Dividend Stocks: A Quick Guide

Did you ever want to learn how to make money from investing in dividend stocks? Well, we are here to give you a quick walkthrough that will help you find dividend growth stocks that are safe picks. So, let’s jump right into it.

What is the first thing you should focus on while evaluating a dividend stock? Well, we would recommend focusing on the sustainability and viability of the dividend. The primary focus should go straight to having secure payments every year. No matter what happens during the year, your payment should be safe.

And, to keep up with the payments, the company has to have a steady cash flow. Logically, lack of it poses a danger to a dividend. If the company’s cash flow is weakening, one of the first costs that will be cut down will be dividends. And the last thing you want in your portfolio is a dividend stock that is failing to pay dividends. That is something that happened to several companies in the energy sector. Chesapeake Energy and Linn Energy both had to remove dividends altogether.

So, what do you need to do to locate a “safe” dividend? Well, checking the cash flow is the most important thing to do. Try to find a company that can afford to cover the payments at least two times over. Some companies are willing to sustain dividends and go into debt, but that is not a sustainable practice.

You should also check the dividend history of the company. Of course, there are no guarantees, but a lot of companies have made it into a habit to raise their dividends each year.

And lastly, it is always a good idea to check if the yields are trending upward, especially if they are nearing the all-time high.

Of course, you are going to want to run some analysis tools. Mainly, most of the basic research that you would use while picking regular growth stocks applies. However, you should add a layer of analysis that focuses on fixed income.

As a dividend stock investor, you should focus on the outlook for the company rather than on individual trades. Not to mention that you should always consider long-term positions. And this is where the difference lies. Most retail investors would tell you that a long-term position is a position you hold for a month. Not for you. The minimum period for holding a dividend stock in your portfolio is a year. And you should usually plan to hold it for a lot more than that.

The drops in the value are also not as critical as they are with regular stock. For example, if the stock falls from $60 to $55, that is not that big of a deal as long as there are no fundamental changes. The dividend is there to cushion the losses and make it a lot easier for you to ride out the low.

Now, we should probably strengthen our understanding by going through some of the concepts of dividends.

We should start with the fact that they are usually paid quarterly, and can be adjusted at every interval, which means that the dividend can grow, fall, or straight out disappear at the interval. That is why you should look for a company that raises the payout consistently.

Now, we should talk about the yield. If you have ever heard someone say that a particular stock comes with a dividend of 5%, they were talking about the yield. The yield is a ratio of the payment the investor gets every year from the dividend stock.

The next factor we will mention is the ex-dividend date. Essentially, this date is the cutoff for the interval payment. So, if you want to qualify for the period dividend, you should make sure to make your trade before that date. So, if you see a share that opened slightly lower than usual, it could be due to the ex-dividend date.

You should also remember that you might have to wait for four weeks after this date to receive the payment. That means that if you sell your shares before this date, the one who bought the shares will receive the dividends. However, if you sell them on the ex-dividend date, or even after, you can still receive the payout. Of course, you should hold the position for a lot longer than weeks, but if you are looking to sell, this tip might get you a bit more money overall.